Rating agency Moody’s Investors Service said credit outlook for Indian banks in 2013 is negative owing to asset quality pressure.

“In India, impaired loans are yet to peak among public sector banks. While the government is likely to remain supportive, relatively high inflation and modest fiscal capacity mean that policy options are constrained compared with China,” Moody’s said in a report. This is in contrast to most other banks in Asia-Pacific region for which the rating agency has given a stable or positive rating on the expectation they will remain insulated from negative credit pressures affecting western banks.

The report says rising asset quality pressures have been barely detectable in most countries in the region. Amongst 17 countries that Moody’s rates in the region, Vietnam was the only other country, apart from India, that received a negative outlook.

The report adds at the same time, it is striking that India and Vietnam are both exceptions to the observation that interest rates in Asia are very low. “Both countries, compared with rest of the region, are seeing higher inflation and weaker exchange rates,” it said.

The report added while interest rates are likely to fall in India in 2013, they will also remain higher than rest of Asia. This situation has translated into weaker resilience for India’s banking systems to the global economic slowdown after a period of relatively rapid credit growth.